PPI index shows inflation increasing at an annualized 4.8%

Overall finished goods PPI prices were higher than expectations, rising 0.4% in September, or a 4.8% annualized increase. PPI food prices increased 1.2%, while energy prices rose 0.5% in the month. Over the last year, headline PPI prices have risen 4.0%. Core finished goods PPI prices were in line with forecasts, rising 0.1% in September. As a result, the year-over-year core PPI inflation rate picked up to 1.6% in September from 1.3% in August (and the core PPI has increased a faster 2.1% at an annual rate over the last three months).

The inflation/deflation debate is over. Finished goods prices are running at around a 4% pace of increase with rising pressures from food prices and a modest pickup in core inflation. Meanwhile, commodity price pressures are increasing in core crude goods, which have risen by over a quarter over the last 12 months.

Easy money is boosting commodity prices, which we expect to feed through the production chain to higher finished goods prices. The Fed is almost certain to announce another round of QE in November, which we think will ultimately add to further gains in prices.

The Fed, however, is focused on the CPI (or its core equivalent within PCE prices) and its outlook for inflation based on the underutilization of labor and the empirically-flawed Phillips Curve model. With 40% of the CPI coming from Owner Equivalent Rent and actual rents, deflation in the housing market has caused the Fed to see inflation as benign and worry about deflation.  Wrong Move Ben.

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